"Vanderbilt is a medical center with a university as a side business." An economist from Vandy made this comment based on the size of the VUMC revenues relative to the traditional academic revenues in explaining big changes in the VU decision-making apparatus over the past 20 years. It's not a case of the tail wagging the dog, the tail has taken over much of the dog.
It's tempting to view universities solely as "academic institutions" where the products are academic instruction and research. In this framework, areas like athletics are mere inputs supporting these outputs. I long held and expressed this outlook. To whatever extent it approximated reality 50 years ago, it misses the mark now. Over recent decades, universities have expanded their "product lines." First, they expanded the educational side from arts and sciences to include many more technical/vocational areas (expanding from existing teacher programs into accounting, information systems, nursing, dental hygiene, sport management, ...). Then, they expanded into non-academic areas including recreational facilities, service opportunities, campus activities, and related stuff. At the outset, these surfaced as seeming inputs in service to the academic agenda of the university. Slowly, almost imperceptibly, they transitioned into products themselves -- the widely-used term "college experience" reflects this broader view of universities as multi-product firms. University as really expensive summer camp. In formal econ language, the ratio of (academic) investment to consumption desired by consumers has shifted more toward consumption and universities have responded.
Intercollegiate athletics, particularly the big revenue sports, fit into this model. Even by the 1950s, athletics had already grown into more than a mere input at many institutions. Over the last 50 years, more schools have moved into this setting with only the Division III schools sticking to athletics as a pure input. These moves don't reflect short-sighted administrators. Rather, they mirror marketplace interests -- lots of students, alumni, and interested parties who care more about the athletics output of the university than what students or notable chemists, physicists, or economists do. Just like medicine at Vanderbilt, athletics, at WKU and even more so at Penn State, is no mere tail. The revenues and salaries driven by fan interest make this abundantly clear.
Trouble arises not because markets care about medical care or athletics along with academics, but because these very diverse products and production processes are tightly integrated from an organizational perspective. Using my dog analogy, there are now separate dogs (academics, athletics, medicine, ...) sewn together into a clunky Frankendog. The institutional structures and supervision of these systems have not kept pace with evolving nature of the products. There is no "great wall" dividing academics and the other areas. This creates many problems, a few of which I mention below.
At Vandy, at least according to my source, it has created a highly centralized decision structure that may fit the medical part but doesn't fit the university part well. At WKU, it results in staff with little academic interest influencing academic outcomes, and faculty pushed into a variety of "experience" areas in which they have little or no expertise.
In regard to athletics at large revenue schools, the poorly designed hybrid encourages the "Subversion of the Academy" that Bobby McCormick and Bob Tollison discussed and questions of "Who's in Charge" as Skip asked. These issues grow out of the underlying product compilation and governance structures that places a university president in charge of a coach who makes a lot more than he/she does and who the public perceives as much more "valuable." It places faculty and staff on perfunctory, powerless athletic oversight bodies when everyone with much sense knows where decisions are made. It intertwines finances and muddles thinking about revenue flows to the extent that many professors think about even relatively large revenue programs take resources away from them. It leads to the recruitment of athletes with little academic skill or interest.
In this view, the solution is not "getting universities back to what they were" but examining the governance structures and decoupling units that really have little to do with each other. Organizational inertia blocks the way and the solutions are complex. Even within academics, the variety of offerings lumps apples and oranges into the same baskets. In regard to athletics, university and athletic administrators (and many fans) want to hold on to the superficial cover of amateurism that the close integration with universities provide. A stand-alone entity governed by its own board that pays royalties and rents to institutions for use of names, logos, and facilities would be subject to much greater labor law scrutiny than an athletic department that, while stand-alone in many respects, still holds the academic part of the university close.